tv Options Action CNBC March 16, 2012 5:00pm-5:30pm EDT
now. this is "options action." your front row seat to the smart money. tonight the ultimate trading app. how would you like to make money in apple if the stock goes up, down, or nowhere at all? it's not on the new ipad. it's just our options trade on the tech giant and we'll show you how you can make money too. plus gas's gain, walmart's pain? gas hits a tenth month high. we've got an options trade on walmart that could make seven times your money in just one month. and why i bought goldman sachs. it's how dan made 60% in goldman in just one month. so what's his plan for making more? the action begins right now. live from the nasdaq market site, i'm in for melissa lee. these are the traders in times square. we want to talk march madness about the numbers.
s&p over 1300. nasdaq over 3,000. but there is only one number we're watching. that's 600. that's what apple touched this week. what does this mean for the market? let's get in the money to find out. i mean, that's the craziest thing here is the market wouldn't be up as much as it is up without apple. you've got to talk about it. >> it's absolutely amazing. talk about the largest market cap. dan was saying earlier nobody cares about the whole numbers and the s&p or the whole numbers in the dow. they only care about the whole numbers in apple. 300, 400, 500, and now 600. the truth is this is not just about apple, options, stock. it's really about america and how america is doing. if you take a look -- if we stop looking at apple for one second and look at things like ten year rates. look at the bounce off the bottom that the stocks like consol took this week. there is a great deal of confidence. some people look at the vix as the barometer of that.
you have to see what stocks are turning around. >> crazy leap for treasury rates. up double digit percentage points. wonder what the bond market is telling stock market. apple rolls out the new ipad today. come out and race the price targets across the board. there's just apple euphoria on wall street right now. >> this ipad one that's sitting in front of me on the desk. at the end of the day, this company has created a product -- they've created a category and they got out to this massive lead. in the last years they introduced three new products. when they think about spending at some point with oil at $1.07, at some point these guys have created a category. it's going to cannibalize something somewhere. i don't know what it is. maybe it's in the pc space, laptops, desk tops. but it's coming from somewhere. we're going to talk about walmart in a little bit. i have to think that apple is
its own little thing that's going -- big thing going on here. there are other guys who will bear the brunt of it. >> you get apple carrying the first leg of it. then if you get money out of the bond market causing the rise in interest rates, right? then you're going to get that next leg higher. that's going to get on apple's back and take the market to another level. >> that's right. because money raced out of the treasury markets out of the bond markets. and a lot of that went into apple. that's the headline. you talked about a bunch of milestones, there's another one the vix. and vix below 15. as low as it's been in five years. it's about america and how america's doing. i actually think it's how people want to either have risk on or risk off. and right now they lo things that are risky and hate things that are not risky. >> here's the thing. kudlow's on in a couple hours, tone down the america is stuff. >> ding dollar! >> there you go. at the end of the day to me, you have to think about this. what does this apple rally mean? the market rally is becoming
narrower and narrower. when you look at the composite 52 week high look at that massive divergence there. what does that tell you? that this rally we're having here is concentrated amongst a handful of stocks. that makes me nervous. >> let's get the technical setup on apple. no better than carter braxtonworth with oppenheimer. will he be the first on television to say sell apple? >> if you want to stand in front of a bus, look at charts. look at a stat. apple is now 40% above its 150 million average. that has happened 160 times since the ipo. every time it's higher. so we're talking about betting against all the odds that this time it's going to come apart. i want to show the current angle. this is why options trading is
the right thing to do. here's a two-year chart. and this shows how excessive this move is. put this same picture on the long-term and you'll see again how far above trend -- that's the same channel but a five-year basis. it is a frequency that's only happened about seven or eight times since the ipo. extreme strength. i have one other thing i would show you. it's the long-term chart of price per share. versus earnings per share. this is back since 1992. a 20-year chart. the judgment is there's a lot of risk to go short apple. that's why we're going to talk about the options trade. for one that's long, is it time to trim? it's not a bad idea. say one in fidelity. you have 40 million, 50 million shares. should you pair back? yes. >> wow. that's the question that a lot of people, mike khouw, are going
to be facing as apple continues to climb higher and higher. touch 600, that was at 550 today. >> kartser made a great point here. he was talking about whether people should be trimming their positions. you may not own apple or think you do. it just represents such a large segment of that index in particular. if we have a graph of what revenues have done for apple over a similar time frame. one of the things you're going to see is that it hasn't just been the price that's gone parabolic lately. basically the can company has been performing. when we look at the company fundamentally, the stock is relatively cheap. i want to throw a couple numbers at you. >> ten times. >> here's the thing. $550 billion company give or take, take out itunes. round it up from 40 billion to 50 billion. that leaves about $400 billion business. what do they do? sell smart phones and computers? who's in the smart phone and
computer business? companies like nokia, htc, dell. what kind of multiples do they trade for? single digits. so it is trading at a premium to its comps. maybe not to the broad market. why? hardware is something you have to keep doing again and again and again. you have to hit home runs to see that growth. apple, if anybody can do it, they can. >> they certainly seem they're capable of doing that. specifically he's going to sell a call spread. here's how you can make money doing this. in this structure you sell one call and then define your risk by purchasing a higher strike call of the same expiration. you want the stock to be below that short strike by expiration. so that would make this a bearish trade. the key thing here is that you can make money whether the stock goes up down, or nowhere at all. on that note, what's the trade? >> it can't go up a whole lot. that's the first thing. a stock like this has
demonstrated it can. this is a way you can collect some premium without risk b your entire future. if you short the stock here is something you're doing. i was looking at selling the june 600 and 630 calls. i'm going to buy the 630s for 6.25. a different through the strikes. the idea is the stock sits here. i'm just going to take the $10 in. if it declines, the same thing. the most you can make is 10 bucks. the most you can lose is what you didn't collect on that difference. so just under $2,000. i really do think, though, if you're going to try to get in front of this freight train that is apple and the market and like i said before maybe america, it's pretty tough to do that. i think this is a risk mitigating way to do it. >> precisely because he's capping his potential losses. and that's what the bottom line comes to and why options are such a good strategy in a case like this. >> i've been throwing a lot of premium long at this.
it's becoming more and more difficult to do as the stock has increased dramatically in a period of time. volatility just exploded this week. this trade kind of takes advantage of that. i don't love the duration here. it's likely to come back at some point. to me looking out a few months i think is long. i would rather make a shorter dated play. >> one of the quick things to point out about doing that. if this runs to 630 and i'm not going to say that's an impossibility. it's not going to give up the full value over the other 20 bucks in that spread. you'll have time to manage that trade a bit. obviously looking for the ball to come in, impacts of declining volatilities impact longer dated options than the shorter ones. we're also trying to give ourselves time for this to play out. >> if you don't have it on your ipad, get it soon. stocks versus options. want to short apple? that's for the strong of heart
and criminally insane. shorting any stock carries unlimited risk. ask the poor soul who shorted apple at seven bucks. risks about $1900 and could make him over a thousand bucks by june. we'll see more of carter later in the show. moving on to the pain at the pump. gas prices hit an 11-month high today and it isn't even summer yet. with crude creeping higher, will the consumer spend less and crimp retailers like walmart and target going forward? dan, consumer sentiment was disappointing today probably because of what gas prices have been doing. that could effect a stock like walmart and other retailers. >> the spending we're seeing is at the high end doing well. walmart reported their q4 in february a few weeks ago, they missed on earnings. wasn't as good as people expected. some areas where people are expecting growth overseas weren't as good as expected. the stock came up 7% in the days
following the earnings report. has since kind of retraced that move and filled in the earnings gap. to me where i see the market kind of top here and i see a name like walmart that could be weak and could be effected by any sustained movement in oil up here and then also back to the apple. at some point like i said, people scraping together every dime to buy the new ipad. so to me, i just want to make a short-term, long premium, low premium bet that walmart comes back and retraces that move to the downside. >> all right. dan's using a put spread. we've used this strategy before. but it's good to crack open the playbook. let's do just that. in this you buy one put and sell a lower strike put of the same expiration. you do this when you're bearish and you want that stock to go to the short put strike. with that said, what's the trade? >> the vol's in this are so cheap. you can buy outright puts.
what i wanted to do is really define the level in which i think it's going. i wanted to look to april. i wanted to buy the stock at 61. i bought the april 50 puts. for 45 cents. i sold one of the 57.5 puts for a dime. my max gain is $2.15 if the stock is 57.5 or lower. i think you have a good shot at this trade. i think the market has extended here. i think this is a name that should be weak if the oil runs. >> i like the thesis. i like being bearish on these names. all of these retailers are going to have a tough time. even gasoline retailers. margins get hurt. we love buying put spreads because the downside put you're selling is relatively very expensive. in real money terms it's really expensive.
i wouldn't sell for a dime even though i understand why dan's doing it. vol in this name is cheap. it's less expensive than the s&p outright. i'd just buy the at the money put for 45 cents and wouldn't care about the dime. >> here's the thing. if that spread was 4.50 bucks and a buck, you probably wouldn't say that. in dan's case he trades these at a clip. the real important thing is think about it in percentage terms. also think about it in terms of probabilities. walmart is a very stable stock. i'm not expecting it to blow through that. if you're going to lay premium out, those are challenging bets. >> selling this for a dime is like selling lottery tickets. >> let's wrap it up now with a little stock. stocks versus options now. shorting walmart better have a lot of money in the bank. shorting any stock is about the riskiest thing you can do. dan's outspread offers -- put spread offers a 7-1 payout and
only risks 35 bucks. choice is, of course, yours. got a question? send us an e-mail. the address "options actio firstname.lastname@example.org email@example.com. we'll answer on the web extra after the show on options action.cnbc.com. here's what's coming up next. don't call him a muppet. last month dan made a bullish bet on goldman sachs. he's already in the green. but will the sky ruin his trade? will he bank on more profits? find out when "options action" returns. it's time for pump up the volume. the names that were heating up options traders sizzle index this week. need to update your surveillance technology? this company's got you covered. they make everything from lasers tonight vision goggles. their bread and butter is in the military aviation field. and options traders blew up the
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we look back on winning trades. everyone nows about goldman sachs. less known is the fact dan made a bullish trade well before this incident. the stock has only moved a little, but dan's made a lot more. and here's why. on "options action" you can take it to the bank, risk less so you can make more. that's exactly what dan did with his bullish bet on goldman sachs. dan thought goldman shars were going higher. >> goldman's going to be one of the first to figure it out. >> but buying the stock? 100 shares will cost you nearly $12,000. so to spend less, dan instead bought the goldman april 120 strike call for $4. now, to make money, dan needs goldm -- but four bucks? we ain't got money like this guy.
show us how to do it for less. >> sell two of the april 130 calls. >> well done. so to spend less he sold two of the april 130 strike calls for a total of $2.60. but he did something else. he made making money even easier and here's how. between the four bucks he spent buying one call and collecting the other two strike calls, he reduced the cost of his trade to $1.40. now instead of needing goldman to rise above $124 to make money, he can see profits if it's above $121.40 by april expiration. in fact, dan now sees profits up to 130. that's where he makes the most money. that's where he wants the stock to go. and there's a tradeoff. by selling more calls than he bought, dan will get short above
$130. beyond that point, profits trail off. of course, with the money dan made on the way up, he wouldn't see losses until goldman traded above $138.60. above that he would face infinite losses. to protect himself against that, he bought the april 140 strike call for an additional 40 cents. and completed his call butterfly for a total cost of $1.80. now dan's protected. and that $1.80 is the most he can lose on that trade. since he spent more, he won't make that much. now to see profits, dan needs goldman to rise by more than that $1.80 he spent on the trade. or above $121.80 by april expirati expiration. what has goldman done? rising some 6%.
now "options action" fans are tuning into every show. and they only want to know one thing. what will dan do now? look at that. that is classy. editor did a nice job with that. >> classy guy. >> before we answer the question of what dan will do now, let's see how much money was made. you'd be looking at a 6% gain. dan's options trade cost $1.80, got a rush of 55%. well done. there's a lot more less in this. dan is sticking with it. have you ever been called a muppet? >> i've been called worse than a muppet. >> awesome. if you're going to bail on your gig, that's a you know what move. >> i'm with you. to be fair, i suggested this as stock replacement. if you made some money here this is a structure to benefit. i like this trade. mike was bullish on america, i'm
bullish on goldman. one whern who lost in this goldman is a publicly traded company and has a responsibility to make that money. so to me, i think the whole situation's a bit silly. i want to stay long. >> time for the upside call times two. two weeks ago khouw and carter teamed up. specifically bought the may 160 strike put for $2.70. that can be sold today for about 4 bucks. what do this charts say now? let's go back to the charts. >> sure. this is the kind of thing we just stick in the trade and get paid. meaning this is a fairly important trade far big asset. 12 years in a row. every december 31st closed higher. now balancing for the first time in a long time. this has all the hallmarks of
major topping out formation. it's a very crowded trade worldwide. and there is a phenomenon when you have a multi-multi-multi-year move. >> what you can do sell the may 157 puts. you you're in the bearish bet. we like to strie to bring those premiums down. >> all right. if you want updates on our trades, be sure to follow us on twitter @cnbc options. and dan posts regular updates on his trades @risk reversal. do check us out. coming up the final call.
tonight on cnbc sports biz, the owner of the houston texans talks strategy after losing one of the best defensive players in the game. tonight at a special time 11:30 p.m. eastern on the nbc sports network. time now for the final call. the last word from the options pits. >> mike is braver than i am, but i would not pick a top in apple. >> pick a top in walmart. >> spread your may 16s 0s in the gld. >> looks like our time has